Rate cuts herald downturn?
From the Globe and Mail:
Canadian banks cut interest rates dramatically yesterday after the Bank of Canada slashed its main rate by half a percentage point and warned that a serious economic slowdown was only just beginning.
All major banks cut their prime lending rate by 50 basis points, amid a central bank warning that Canada faces a tough two years. A troubled U.S. economy has hit exports hard, and undermined business and consumer confidence, the bank said.
Marking the most serious cuts since the post-9/11 downturn, the bank has now cut rates twice in six weeks. Its key rate now stands at 3 per cent, 150 basis points lower than where it stood last fall. (A basis point is one one-hundredth of a percentage point.)
“The bank is now projecting a deeper and more protracted slowdown in the U.S. economy,” it said in a release. “This has direct consequences for the Canadian economic outlook, with declining exports projected to exert a significant drag on growth in 2008.”
Will these recent rate cuts boost our market further or prevent a downturn? Certainly dropping rates is a way to discourage saving and encourage taking on more debt, but is the central bank in danger of kicking up inflation? So far rate cuts and fiscal stimulus plans in the US have done little to stem dropping house prices and a sputtering economy.
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April 23rd, 2008 at 9:19 am
No sharp spike, but traffic has grown steadily. In the last month unique visitors have doubled and even more noticeable is that people seem to be more vocal, the last posting has close to 150 comments in 2 days which is great to see.
There’s likely a lag between when someone first visits a blog and when they feel like adding their own comments. I enjoy seeing both sides of the debate even though you can likely tell what my opinion on the Vancouver market is.
April 23rd, 2008 at 9:35 am
By the way, AP and Dosh, no hard feelings eh? I hope your future career choices are better than your current one. Here’s a tip, instead of following the crowd try finding a niche that’s likely to provide steady work for some time to come.
Also, assuming my guess about your investment habits is correct, it’s probably best not to sink all that you’ve earned into the same field where you work. Because if it goes belly up you lose everything.
April 23rd, 2008 at 9:53 am
April 23rd, 2008 at 9:56 am
So maybe psychology has changed as the US situation filters into local media, but who knows, maybe these rate cuts will add more fuel to the fire and we’ll see another leg up in prices.
April 23rd, 2008 at 10:02 am
The BOC dropping rates is going to do nothing for the future of housing values or salaes. Property has to drop 30-50% in order to generate serious demand again for the masses……and about 10,000 listings have to dissappear.
I can still rent for 1/3 the cost of buying, even with the rate cuts…….if rates were zero, it would still be better to rent as it would cost 1/2 of buying in my situation. Still to much.
April 23rd, 2008 at 10:07 am
How are you going to try to spin rate cuts as a negative for the market?
April 23rd, 2008 at 10:39 am
April 23rd, 2008 at 10:41 am
I don’t need to “spin” it, I’ll leave that game to you guys. Historically rates have had very little impact on whether prices go up or down. Aside from which, this is the what third rate cut in a year? Go to the banks, compare what your rate would be now, with the same credit rating, down payment etc. to what your rate would have been a year ago. You’ll find that you’re at best equal to a year ago and likely you’re paying MORE interest. The BOC does not set the rates the banks will give a customer, they just set the rate at which they lend to the banks.
“Drachen, get a job”
Tsk tsk, getting a little angry there? Did I hit too close to the mark?
“Besides, bears live in caves, not bulls.”
True. Where do snakes live? Little holes I suppose, not properly called “caves”. I stand corrected.
All sniping aside I do mean it when I say no hard feelings. It’s understandable that you’re angry, you stand not only to lose your job but everything you’ve put aside over the past years in “investment” properties. In fact if I gauge you correctly you could be entering bankruptcy in a year or two. I’d be stressed in your shoes too. But there’s little point in taking it out on people here, you won’t change any minds and you’re just wasting time when you could be dropping your asking price on your “investment” properties before it’s too late.
April 23rd, 2008 at 10:48 am
If it’s so positive why are the banks complaining? Does it have something to do with their argument that it’s costing them more?
April 23rd, 2008 at 11:04 am
You have a counter argument? I’d love to hear it!
Honestly, anything at all which is a genuine argument would be a wonderful change of pace. You know, numbers, facts, historical data (not like the stuff you make up because you WANT it to be true like the Toronto/Vancouver thing). Also because you “feel” things should be true isn’t really an argument either, unless you have done some study that supports your feelings.
Oh and to anyone paying attention, notice neither of them is denying their occupation or investment habits.
April 23rd, 2008 at 11:30 am
April 23rd, 2008 at 11:53 am
April 23rd, 2008 at 12:46 pm
Best thing about rates cuts for vancouver:Rates cuts are based on the economic performance and the performance for futute of the nation but benefit goes to all the red hot city of the nation,While market is up in Vancouver interest rates are going down,down,and down.
“You’ll find that you’re at best equal to a year ago and likely you’re paying MORE interest. The BOC does not set the rates the banks will give a customer, they just set the rate at which they lend to the banks.”-Drachen
WRONG,Interest Rates cuts effect the variable rates and rates for personal line of credit right away,It also affect the mortgage rates for new buyers right away.
even the previous buyer who are locked in terms can ring the well to re-adjust or check the rates in different banks,if your bank is not agree to change the rates break the agreement to hook up with new bank but only if there is good margin after panelty.
Drachen why don’t you take some vocation?
April 23rd, 2008 at 1:14 pm
“Variable Rate Mortgage (also known as a floating rate mortgage): A mortgage in which your monthly payments remain the same throughout the term but the amount applied towards the principal (amount initially borrowed under the mortgage) versus interest may change with fluctuations in Bank of Montreal’s Prime Rate. As a result, the amortization period may be longer than you selected if interest rates have risen since the start of the term, or shorter if interest rates have fallen since the start of the term.”
Emphasis is mine. BMO, not BOC sets the rate. They can choose (and have) not to adjust their rate just because the BOC did.
April 23rd, 2008 at 1:24 pm
Has anyone else been buying REIT’s since they started dropping rapidly a year ago?
The two mutual funds I like are down 20-30% YOY and the big Canadian REIT shares have nice yields and are way down from their peak.
Obviously the rate cut will do nothing to stop the prices in Vancouver from falling 40% but the REIT’s can compliment a balanced portfolio a little bit since they diversify across sectors and countries and they can figure out which countries have fundamentals worth going into.
Is anyone else here diving into REIT’s?
April 23rd, 2008 at 1:45 pm
Wrong again,BOC is not BMO and BMO is not all the banks, prime rates are automatically adjusted to variable and personal line of credit.
Even in the bmo statement you can read the rates cut effect the variables right away no matter if those go to pay the principle or interest on the saving purpose it has a same meaning.
In other words Variable rates mortgage and the personal line of credit is a product with built in condition so no matter how you look at them but same meaning
April 23rd, 2008 at 1:57 pm
April 23rd, 2008 at 2:01 pm
Ok, I’ll spell it out in very simple terms.
The BOC sets the rate at which they lend to the banks.
The banks set the rate at which they lend to their customers and the rate to which variable rate mortgages are adjusted.
The banks are under NO obligation to match the moves of the BOC with their prime rates. I think you may be getting confused with the term “prime rate”. You see each bank sets the bank’s own “prime rate” that is the rate mortgages are adjusted to. The Bank of Canada also has a prime rate but that is the rate at which they will lend money to the banks.
If you don’t believe me, check the different banks, they are competitive so they will have very similar prime rates posted but if you look I am sure you will find some with different posted prime rates.
April 23rd, 2008 at 2:03 pm
http://www.cbc.ca/money/story/2008/01/16/primerate.html
April 23rd, 2008 at 2:14 pm
The market is a dead man walking. The more people that buy now at the peak, the more severe the bust will be.
I always hope that more people will buy at the peak. When their capital and credit is destroyed in the bust, there remains VERY LITTLE MONEY out there chasing the available inventory. This means that my money and credit will buy more.
Therefore, the more real estate people buy now at the peak of the market, the cheaper housing will be as the bust progresses.
For this reason, I LOVE hearing Bill Good pump the market. All he is doing is luring suckers in to have their capital evaporated. In a bust it amounts to a destruction of copetition for houses as there is very little money out there to compete with.
I bet Bill Good has a hoard of cash ready to buy when he and the few others who have saved are the “last men standing” to buy from despterate sellers who have no other buyers.
April 23rd, 2008 at 2:23 pm
The more people that buy at the peak, the less there will be to buy at the bottom.
We should applaud Bill Good for getting as many people as possible to buy at the top. I hope he can keep it up in the face of plunging sales and rising inventory.
Sure, it will be a financial disaster for those who listened to Bill but it will be great for me and and other bears because we will profit more because of his efforts.
April 23rd, 2008 at 2:45 pm
‘
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The Fed, in the US can set rates because it is a “wholesaler” of a sort to the banks in the US, and therefore it can control short term rates.
In Canada such is not the case, although BOC could become a lender of last resort to retail bankers in the event there is a run on a particular bank.
When BOC sets the rates in Canada it is a signal to the banks as to the direction it wants the banks to move, if the banks do lower or increase their loan rates, they do so voluntarily.
BOC has other methods of influencing interest rates, but that’s another story, and I doubt Krrissh , Krassh or whatever the fool calls himself today could possible be made to understand .
But suffice to say, BOC won’t save you when the bubble pops.
April 23rd, 2008 at 2:48 pm
Wrong,
1.rates cut always encourage new buyers to get into the market.
2.rates cut also encourage the present owners to hold their properties.
Result
*Threat to economy and real estate downturn since 2005 (VHB era).
*Metro Vancouver population 2,289,900 (2007)
*Current MLS around 14,000.same as usual.
*March Sales Results
Detached $764,616 +3,274 +.43%
Attached $473,543 +1,396 +.29%
Apartments $389,609 +2,577 + .67%
April 23rd, 2008 at 2:52 pm
I sometime wonder just how heavily invested Bill Good is in Real Estate.
I am tempted to phone him and ask for disclosure, and if he is heavily invested should he not announce it every time he does a show, and call it an infomercial?
I wonder if the CRTC would be interested
April 23rd, 2008 at 3:08 pm
you said:
1.rates cut always encourage new buyers to get into the market.
No. Rate cuts in the US have so far not encouraged new buyers. As pointed out before Japan cut their rates to 0% (YES ZERO) to try to bring in new buyers. Whats next, paying people to take loans? I’ll have a trillion dollars in that case.
you said:
Current MLS around 14,000.same as usual.
Wrong again. Since the very first month of 2005 REBGV listings have NEVER gone over 14,000. As of yesterday current listings stand at 14,731 which is a thousand more than we’ve had at any point on this graph.
Try posting something that isn’t completely false.
April 23rd, 2008 at 3:10 pm
If by “same as usual” you mean higher than it’s been in at least 4 years then yes…
“Metro Vancouver population 2,289,900 (2007)”
Is this somehow relevant? You keep bringing it up. You DO know that Vancouver is not an especially large city right?
“1.rates cut always encourage new buyers to get into the market.
2.rates cut also encourage the present owners to hold their properties.”
You’re still pretty unclear on the whole bank rate thing aren’t you? Also, as an added bonus, if you’d read and understood my above quote from the BMO site you’d realize that even if banks cut their rates it has no impact on the amount of money their clients pay each month. Rather the time line of the mortgage is adjusted.
April 23rd, 2008 at 3:27 pm
Existing Home Sales - April Report
Last Updated: 3/28/2008
Home Sales Report Summary
Sales of existing homes in the USA went up by 2.86% last month, from 4.89 million homes to 5.03 million homes.
April 23rd, 2008 at 3:47 pm
What does Calcutta have to do with anything?
Someone escaping horrific living conditions won’t have $2 million in the bank, which according to your moronic logic is what your crappy unit at tv towers will be worth,and that means they can’t move here!
They would be happy anywhere in the first world regardless (that means they’d be happy to live in Red Deer Alberta).
Paying down the principal on your mortgage faster does not equal more spending money now. To dumb it down for you. If you had a mortgage in 1994 and went to renew the 5 year terms they’d have allowed you to keep the payments the same but pay it off 7 years faster, this means that instead of paying it off in 2019 you could pay it off in 2012, this does not mean more money or increased buying power in 2008, and since everyone knows the market is going to tank they’ll be no extra buyers.
Display Suites for new condos are now offering an additional $15,000 for 2 bedroom units on top of the usual commission and $5,000 for 1 bedrooms. If Vancouver is so great why are they still for sale Krisssh?
Each Bank sets it’s own prime rate, you do not and never will hold a mortgage with the Bank of Canada.
You might be looking at your variable mortgage and seen that your bank mimicked the Bank of Canada but if you read any of the links or the newspaper you’d have seen that the banks initially balked at changing their rates.
In all likelihood you have a mortgage with one of Canada’s subprime lenders like Xceed or Maple Trust.
It’s going to be wonderful watching you trying to explain the market as it tanks 40% this year, idiot.
April 23rd, 2008 at 3:54 pm
you inventory chart and reference site has a wrong data than you had claim listing on the link chart is 13,800 and on the total rebgv stat is 13,800 but their hand made total is 14,731 don’t go to paul whatever again they like to post wrong numbers to make bear look like monkeys hu.
April 23rd, 2008 at 4:11 pm
Did you really fill out your own mortgage application or did someone do it for you?
April 23rd, 2008 at 4:15 pm
Month Sales Ave Price Sales Value
Mar-08 2,997 $616,496 $1,847,638,512
Mar-07 3,582 $554,941 $1,987,798,662
Total sales value is down 7% year over year.
Meanwhile, as the US Fed has slashed interest rates, new home sales in the US have fallen from 611k per month in Nov 07 to 590k per month in Feb 08. Numbers for March out tomorrow.
April 23rd, 2008 at 4:16 pm
then why did he throw at me with some other reference? if you are trying to correct him write it down with request otherwise I won’t accept your recomendation.
Don’t waste my time again.
April 23rd, 2008 at 10:51 pm
April 24th, 2008 at 2:33 am
I have a variable mortgage at TD. They have followed the BOC each and every time in the last three years with interest rate adjustments. They have just lowered there prime rate again (one day after BOC). And as I recall, all major Canadian banks have followed suite in the last couple of months.
For me as an investor (not speculator), a 50 base point cut is a good reason NOT to sell. Fortunately, positive After-Tax-Cashflow doesn’t push me into having to sell. Therefore the most important figure for me is not the fluctuating market value of my property but perhaps the Cash-on-cash return as well as the total return on my rental investment (including principle reduction, which is directly affected by interest rate adjustments).
I am sure I am not the only market participator who thinks like that and keeps his eye on the fundamentals, while others get carried away by emotion!
April 24th, 2008 at 8:34 am
If you own Real Estate in Vancouver that you don’t live in you are a speculator. An investor would only buy when the rent/price ratios were reasonable and would sell if those ratios went too far off base. If there’s no profit margin you are speculating that prices will go up.
“I am sure I am not the only market participator who thinks like that and keeps his eye on the fundamentals”
If you currently own real estate in the lower mainland you either do not understand what the fundamentals are or you most certainly are not keeping a close eye on them.
Please explain what you see as the “fundamentals” of the market.
April 24th, 2008 at 9:38 am
What numbers do you look at when deciding whether to buy or sell a property?
What mathematical formulae do you use to decide whether the numbers work for you or not?
April 24th, 2008 at 11:13 am
this high priced market is creating a lot of renters. and these renters need a place to stay. why would current owners sell their place if they can find renters to rent too?
if rental income covers mortgage with profit >>> definitely will not have to sell
if rent covers mortgage >>> will not have to sell
if rental is below mortgage >>> not the end of the world, may sell or not sell.
if rental income is way below mortgage >>> will have to sell.
would be great if someone understands what im trying to say and explain in simple terms.
April 24th, 2008 at 11:53 am
Ok, let’s assume that 75% or more of landlords in the city expect a return for their investment which is equal or better than they can do with a high security mutual fund. I think this is a safe assumption because with the hassles and extra work of being a landlord as opposed to parking your money most people would prefer the latter if returns are the same.
So, to your examples:
1) Rent = Mortgage payment +
This landlord has two problems. One There must be a significant amount of money tied up in the property for it to be positive cash flow. If one compares the return on that money you’ll always find (in the current market) that if the property is not appreciating in value the owner would be better off putting that money in mutual funds (anyone out there have a real world example?).
So, hypothetically (this is a pretty normal ‘investment’ property in Vancouver AFAIK):
Property is a house with 4 units for rent.
Value to sell: $1,000,000
Rents for: $4,000 (48,000 per year)
So, even if the property is owned OUTRIGHT, the return per year before property tax, maintenance and times when a suite is open the return is 4.8% per year. Someone with a good mutual fund help me out here, it’s what 6-6.5% for “safe” returns?
Keep in mind that all of this is with the property value flat, if it’s going down the math gets rapidly worse. If the property value dropped by 50% it would take over 20 years of rent to offset that loss in value.
You tell me, is the property worth hanging on to or would you sell once prices start to drop?
April 24th, 2008 at 2:15 pm
http://langley-financial-planning.blogs … upply.html
We’ve got a record number of condos under construction, we don’t have as much immigration as we had ten years ago, and new residents are coming with less money than they used to. BC Hydro says there are 18,000 empty units just downtown. I work with people who have ‘invested’ in condos - this means they pay several hundred dollars a month over what they earn in rent from these units. Do you think they’ll hold on to them if they lose their jobs?
April 24th, 2008 at 8:14 pm
April 24th, 2008 at 11:45 pm
I am talking about rental market not the real estate market in general. The rental market is great. Vacancy is low. A “blow-up” of the “bubble” will just flood the rental market with demand and raise rental prices. People always complain about the high Gross Rent Multiplier (GRM) in Vancouver, but they do not realize that in the last couple of years rent has actually increased quite a bit (for me average 5% annually in the last 3 years) and my net operating income increased even more. Perhaps appreciation outperformed the increase in rent by far, but for me as an investor it is the increase in rent that I am looking for. Appreciation is just a bonus.
“if rental income covers mortgage with profit >>> definitely will not have to sell”
That is absolutely correct. As I mentioned: Positive Cash-flow after tax, Cash-on-cash return in 2007 of 7% and expected lower interest rates will boost my total return on investment this year to almost 9% and allows me to further exploit leverage effects. That is investing, not speculating!
Why is Drachen talking about speculating? Please correct me if I am mistaken, but isn’t a real estate investment for rental purpose a conservative form of investing.
April 24th, 2008 at 11:58 pm
If we happen to own a property - either outright or with a mortgage close to being paid off - and we can at least break even renting it, chances are we’ll hold on to it whether prices go up or down. It may not be the best financial decision, but it’s still the one we make.
I know a few people who’ve held on to condos they bought years ago and have since moved out of. They’re quite happy to collect the small sum that comes to them in rent each month.
April 25th, 2008 at 12:19 am
If I wanted to buy now, I would closely look at: Inventory, Listed vs. Sold, BOC Prime, CPI, population growth and of course my personal financial situation.
If I would invest for rental purposes I’d would further look for: low GRM, high CapRate, high DSCR, low Interest Rates, positive after tax cash-flow and high CCR.
Yeah and let’s not forget positive effects of the Olympics … just kidding!
I would probably not buy now, because prices are to high for a decent return on investment. But nevertheless that doesn’t apply to people who entered the market a couple of years ago. Receiving over $1,000 dollars per month rent for a condo that you have bought 5 years ago for a mere $120,000 will make things look much more positive than one would expect!